Master thesis

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Abstract

Rights issues are a common way to raise equity in the Scandinavian market (Norway, Sweden and Denmark). We have investigated underwritten rights issues in the Scandinavian countries for the period 2002-2010. Our full sample consists of 101 rights issues. The focus of this thesis is to examine the relationship between risk and reward relating to underwriting services

and possible differences within Scandinavia. Based on the suggestion of Galai and Schneller (1978) we have assessed the value of the underwriting service using option pricing framework.

Based on our analyses we found that the underwriting fee charged in the Scandinavian market produces excess returns to the underwriters. The mean underwriting fee charged is proven to be 3.58 %. The underwriters earned on average an excess return of 2.72 %. This means that on average 76 % of the underwriting fee is excess return to the underwriter.

The highest degree of mispricing we observed in the Swedish market, where excess returns to the underwriter are 3.63 %. Norway seems to have the most efficiently priced underwriting market.

The average put values in the Scandinavian market are similar to that of previous research and the higher excess return, ceteris paribus, must thus be explained by higher underwriting fees.

We also had a qualitative approximation to our problem where we interview three investors and three banks. In general it appears that investors and banks have many of the same thoughts in the questions asked regarding the risk and pricing of the underwriting fee.